Starbucks warns of uncertainties around its near-term China outlook

Starbucks warned of uncertainty around its outlook for China over the next six months, sending shares lower in after-hours trading as chief executive Laxman Narasimhan presented the coffee chain’s results for the first time since taking over from Howard Schultz.

Average weekly sales in China, Starbucks’ largest market after the US, had started to moderate after a “faster than expected recovery” during the first three months of 2023, the company said on Tuesday. Although the chain reaffirmed its overall outlook for the year, the uncertainties around the Chinese economy’s post-pandemic path could result in uneven earnings growth in the months ahead.

That unnerved investors and sent shares 5.5 per cent lower in after-hours trading on Tuesday following the earnings call. If the move holds into Wednesday’s session, it would put the company’s shares on course for one of their biggest daily drops of the past two years.

Chief financial officer Rachel Ruggeri said the company expected average weekly sales in China to keep increasing quarter-over-quarter, but at a more moderate pace than what it experienced in the latest three-month period.

“We’ve already seen it start to moderate,” she told analysts on Tuesday. “That’s really driven by the fact that there’s still some uncertainty in the overall environment from a recovery standpoint when you look at things like consumer behaviour as well as recovery in key segments like our international travel.”

The company is still predicting earnings per share to increase between 15 and 20 per cent for fiscal 2023, but Ruggeri said earnings growth in the third quarter would be “meaningfully lower” than that target, while fourth-quarter growth would be “slightly above the high end” of that range.

As China reopens from tough Covid-19 lockdowns, its gross domestic product expanded 4.5 per cent year on year in the first quarter, lower than the government’s official forecast but still higher than analysts expected. Still, concerns remain whether the country can sustain its rebound.

Narasimhan joined Starbucks in October as “incoming CEO”, having stepped down from his role as head of UK consumer products group Reckitt. He took the reins last month from Schultz, who was leading the coffee chain for the third time as he sought to overhaul the Seattle-based company.

Narasimhan said on Tuesday: “I have been impressed with the great progress and forward momentum of the company, and I am optimistic about our long-term growth headroom and the margin improvement potential.”

In the three months to April 2, Starbucks reported an 11 per cent rise in comparable store sales — a closely-watched industry metric — from a year ago, surpassing Wall Street forecasts for about 7.4 per cent. The company’s net profit jumped more than one-third to $908.3mn, with revenue rising 14 per cent increase to $8.7bn, both higher than analysts expected.